Margin Call

A margin call is a demand from a broker for a trader to deposit additional funds or securities into their account because the value of their positions has fallen below the required maintenance margin. If the trader does not meet the margin call, the broker can forcibly close positions to cover the shortfall.

What Is a Margin Call?

When you trade on margin (using borrowed money from the broker), you only put up a fraction of the total trade value. The broker lends the rest. If your position moves against you and your account equity falls below the maintenance margin level (typically 50% of the initial margin for equity positions), a margin call is triggered.

**Example:**
Initial margin: Rs 50,000
Total position value: Rs 2 lakh (you borrowed Rs 1.5 lakh)
Maintenance margin: 25% of position value = Rs 50,000

If your position falls to Rs 1.6 lakh, your equity = Rs 1.6 lakh – Rs 1.5 lakh (borrowed) = Rs 10,000. This is below the maintenance margin of Rs 40,000 (25% of Rs 1.6 lakh). A margin call is triggered.

How Brokers Handle Margin Calls

1. The broker sends a margin call notification
2. The trader must deposit additional funds within a specific time (usually by the next trading day)
3. If funds are not deposited, the broker may liquidate positions without further notice

In Indian futures and options trading, brokers must maintain SEBI-specified margin norms. If a client’s margin falls below the required level, the broker typically sends an auto-generated margin call notification.

Margin Calls in Futures Trading

Futures positions are marked-to-market daily. If your futures position loses value overnight, the loss is debited from your margin account. If the remaining balance falls below the maintenance margin, a margin call is triggered the next morning.

Avoiding Margin Calls

– **Use position sizing**: risk only a small percentage of capital per trade
– **Do not use maximum available leverage**: use significantly less leverage than the broker allows
– **Monitor positions regularly**: especially for overnight positions
– **Keep a buffer above the maintenance margin**: do not operate at the edge of available margin

Practical Example

Karthik buys 5 lots of Nifty Futures worth Rs 55 lakh against an initial margin of Rs 6.6 lakh (12%). Nifty falls 2% overnight, creating a Rs 1.1 lakh loss. His margin balance falls to Rs 5.5 lakh, below the maintenance margin of Rs 5.775 lakh. His broker sends a margin call for Rs 1.1 lakh by 9:30 AM. If he doesn’t pay, the broker will square off 1 to 2 lots to restore the margin ratio.

Key Takeaways

– A margin call demands additional funds when account equity falls below the maintenance margin
– Failure to meet the margin call results in forced position liquidation by the broker
– Futures positions are marked-to-market daily; overnight losses can trigger margin calls the next morning
– Using significantly less than the maximum allowed leverage reduces the risk of margin calls
– Always maintain a comfortable buffer above the maintenance margin to avoid sudden forced liquidation